Financial accounting IFRS 4 kieoso ch06 PPT

Financial Accounting
IFRS 4th Edition

Weygandt ● Kimmel ● Kieso

Chapter 6

Inventories


Chapter Outline:
Learning Objectives
LO 1 Discuss how to classify and determine inventory.
LO 2 Apply inventory cost flow methods and discuss
their financial effects.
LO 3 Indicate the effects of inventory errors on the
financial statements.
LO 4 Explain the statement presentation and analysis of
inventory.

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Learning Objective 1
Discuss How to Classify and Determine
Inventory

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Classifying and Determining Inventory
Merchandising
Company

Manufacturing
Company

One Classification:

Three Classifications:

• Merchandise
Inventory

• Raw Materials
• Work in Process
• Finished Goods

Helpful Hint
Regardless of the classification, companies report all inventories
under Current Assets on the statement of financial position.
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Determining Inventory Quantities

Physical Inventory taken for two reasons:
Perpetual System
1. Check accuracy of inventory records.
2. Determine amount of inventory lost due to wasted
raw materials, shoplifting, or employee theft.
Periodic System
3. Determine the inventory on hand.
4. Determine the cost of goods sold for the period.
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Taking a Physical Inventory
Involves counting, weighing, or measuring each kind
of inventory on hand.
Taken,
• when the business is closed or business is slow
ã at the end of the accounting period

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Determining Ownership of Goods (1 of 5)
Goods In Transit
• Purchased goods not yet received
• Sold goods not yet delivered
Goods in transit should be included in the inventory of

the company that has legal title to the goods.
Legal title is determined by the terms of sale.

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Freight Costs (2 of 5)

Ownership of the goods
passes to the buyer when the
public carrier accepts the
goods from the seller.

Ownership of the goods
remains with the seller until
the goods reach the buyer.

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Determining Ownership of Goods (3 of 5)
Review Question
Goods in transit should be included in the inventory of
the buyer when the:
a. public carrier accepts the goods from the seller.
b. goods reach the buyer.

c. terms of sale are FOB destination.
d. terms of sale are FOB shipping point.

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Determining Ownership of Goods (4 of 5)
Review Question
Goods in transit should be included in the inventory of
the buyer when the:
a. public carrier accepts the goods from the seller.
b. goods reach the buyer.
c. terms of sale are FOB destination.
d. terms of sale are FOB shipping point.

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Determining Ownership of Goods (5 of 5)
Consigned Goods
To hold the goods of other parties and try to sell the
goods for them for a fee, but without taking ownership of
the goods.
Many car, boat, and antique dealers sell goods on
consignment. Why?

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Do It! 1: Rules of Ownership (1 of 2)
Deng Imports completed its inventory count. It arrived at a total
inventory value of ¥200,000. You have been given the information
listed below. Discuss how this information affects the reported
cost of inventory.
1. Deng included in the inventory goods held on consignment for
Falls Co., costing ¥15,000.
2. The company did not include in the count purchased goods of
¥10,000, which were in transit (terms: F O B shipping point).
3. The company did not include in the count inventory that had
been sold with a cost of ¥12,000, which was in transit (terms:
F O B shipping point).
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Do It! 1: Rules of Ownership (2 of 2)
Solution
1. Goods of ¥15,000 held on consignment should be deducted
from the inventory count.
2. The goods of ¥10,000 purchased F O B shipping point should be
added to the inventory count.
3. Item 3 was treated correctly
Inventory should be Ơ195,000

(Ơ200,000 Ơ15,000 + Ơ10,000)

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Learning Objective 2
Apply Inventory Cost Flow Methods
and Discuss Their Financial Effects

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Inventory Methods and Financial Effects

Inventory is accounted for at cost.

• Cost includes all expenditures necessary to acquire
goods and place them in a condition ready for sale
• Unit costs are applied to quantities to determine the
total cost of inventory and cost of goods sold using
the following costing methods:


Specific identification



Cost flow assumptions (First-in first-out and
Average-cost)
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Specific Identification (1 of 3)
Illustration: Crivitz TV Company purchases three identical 50inch TVs on different dates at costs of £720, £750, and £800.
During the year Crivitz sold two sets at £1,200 each. These
facts are summarized below.
Purchases
February 3
1 TV at £720
March 5
1 TV at £750
May 22
1 TV at £800
Sales
June 1
2 TVs for Ê2,400 (Ê1,200 ì 2)
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Specific Identification (2 of 3)
If Crivitz sold the TVs it purchased on February 3 and May 22,
then its cost of goods sold is £1,520 (£720 + £800), and its

ending inventory is £750.
Cost of Goods Sold
Ending Inventory

£750

£720
£1,520

£800
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Specific Identification (3 of 3)
Costing method in which items still in inventory are
specifically costed to arrive at the total cost of the ending
inventory.

Practice is relatively rare
Most companies make assumptions (cost flow
assumptions) about which units were sold

LO 2

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Cost Flow Assumptions (1 of 6)
There are two assumed cost flow methods:
1. First-in, first-out (FIFO)
2. Average-cost
Cost flow does not need be consistent with the physical
movement of the goods.

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Cost Flow Assumptions (2 of 6)
Illustration: Data for Lin Electronics’ Astro condensers.
Date
Explanation
Jan. 1
Beginning inventory
Apr. 15 Purchase
Aug. 24 Purchase
Nov. 27 Purchase
Total units available for sale
Units in ending inventory
Units sold

Units
10
20
30

40
100
(45)
55

Unit Cost Total Cost
HK$100
HK$1,000
110
2,200
120
3,600
130
5,200
HK$12,000

(Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold

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Cost Flow Assumptions (3 of 6)
First-In, First-Out (FIFO)
Costs of earliest goods purchased are first to be
recognized in determining cost of goods sold
Often parallels actual physical flow of merchandise
Companies determine cost of ending inventory by
taking unit cost of most recent purchase and

working backward until all units of inventory have
been costed
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First-In, First-Out (FIFO) (1 of 2)
Date
Jan. 1
Apr. 15
Aug. 24
Nov. 27

COST OF GOODS AVAILABLE FOR SALE
Explanation
Units
Unit Cost
Beginning inventory
10 HK$100
Purchase
20
110
Purchase
30
120
Purchase
40
130
Total

100

STEP 1: ENDING INVENTORY

Total Cost
HK$1,000
2,200
3,600
5,200
HK$12,000

STEP 2: COST OF GOODS SOLD

Unit
Total
Date Units Cost
Cost
Nov. 27
40 HK$130 HK$5,200 Cost of goods available for sale
Aug. 24
5
120
600 Less : Ending inventory
Total
45
HK$5,800 Cost of goods sold
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HK$12,000
5,800

HK$ 6,200
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Cost Flow Assumptions (4 of 6)
Average-Cost
Allocates cost of goods available for sale on basis of
weighted-average unit cost incurred
Applies weighted-average unit cost to units on hand
to determine cost of ending inventory

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Average-Cost (1 of 2)
Date
Jan. 1
Apr. 15
Aug. 24
Nov. 27

COST OF GOODS AVAILABLE FOR SALE
Explanation
Units
Unit Cost
Beginning inventory
10 HK$100
Purchase

20
110
Purchase
30
120
Purchase
40
130
Total
100

STEP 1: ENDING INVENTORY
Unit
Total
Units
Cost
Cost
HK$12,000
÷ 100
= HK$120
45

LO 2

HK$120

HK$5,400

Total Cost
HK$1,000

2,200
3,600
5,200
HK$12,000

STEP 2: COST OF GOODS SOLD
Cost of goods available for sale
Cost of goods sold
Less : Ending inventory

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HK$12,000
5,400
HK$ 6,600

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Financial Statement and Tax Effects
of Cost Flow Methods
Either of the two cost flow assumptions is
acceptable for use.

Lenovo (CHN) uses the average-cost
method
Yingli Solar (CHN) uses average-costing
for key raw materials and FIFO for the
remainder of its inventories
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